[Mayannk is a student at Jindal Global Law School.]
The Insolvency and Bankruptcy Code 2016 (IBC) has, since its inception, struggled to categorise homebuyers / allottees of residential projects within the framework of the code. However, the position was finally settled by the Supreme Court of India in Pioneer Urban Land and Infrastructure v. Union of India and crystallized by the legislature by way of insertion of Section 5(8)(f) where homebuyers were finally considered as financial creditors albeit unsecured ones.
Despite this newfound clarity, the dynamic nature of real estate insolvency often leads to a situation where a homebuyer’s remedies under the IBC are at odds with other legislations, which, for homebuyers, happens to be the Real Estate (Regulation and Development) Act 2016 (RERA). An instance of this predicament was brought to light recently in Vishal Chelani and Others v. Debashis Nanda (Vishal Chelani) where the apex court critiqued the classification of homebuyers who secured a decree under Section 18 of the RERA as ‘financial creditors’ as opposed to homebuyers who wished to initiate CIRP against the project as a ‘class of creditors’.
This post is an attempt at deconstructing the Supreme Court of India’s findings in Vishal Chelani by tracing the arbitrary classification of homebuyers who have secured a decree under the RERA as opposed to homebuyers who wished to initiate corporate insolvency resolution process (CIRP) without procuring such a decree. The (mis)implications of such classification are also set out in the latter section of this post.
Backdrop of the Controversy
The appellants in this case were homebuyers in the proposed real estate project of the corporate debtor (CD). Pursuant to the CD’s failure to handover the possession to the appellants, they approached UP RERA and initiated proceedings under Section 18 of the RERA seeking recovery of the deposit amount along with interest from the CD. The UP RERA decreed in favour of the appellants and accordingly directed the CD to return the said amounts.
During the course of UP RERA proceedings, a Section 7 application was filed under the IBC against the CD, and a CIRP was initiated. It is pertinent to note is that upon initiation of CIRP, the recovery certificate issued to the appellants by the UP RERA on account of the decretal amount was still not satisfied which, in a practical sense, deemed the appellants to be at par with the homebuyers who had not approached the UP RERA for a refund.
Shortly afterwards, the CD was admitted into insolvency by the Adjudicating Authority, pursuant to which the resolution professional invited claims from the respective stakeholders. Upon invitation of such claims, the appellants, being homebuyers, filed claim Form CA (meant for the homebuyer category) which was admitted by the resolution professional. However, the professional was substituted in the course of the proceedings with the respondent in the current case who rejected the appellant’s claim as homebuyers and instead directed them to file their claim in Form C (meant for financial creditors). As a result, the appellants were indirectly reclassified as financial creditors as opposed to a ‘class of creditors’ which barred them from taking advantage of certain rights and remedies available exclusively to home buyers as provided in the Insolvency and Bankruptcy Code (Second) Amendment Act 2018.
Substance of the Dispute
The bone of contention arose when the resolution plan was floated by the resolution applicant in consultation with the committee of creditors, which provided for a differential treatment of claims filed by the appellants as financial creditors and the rest of the homebuyers as a class of creditors. As per the terms of the plan, the class of creditors were offered more beneficial terms than the appellants, since they had opted for a remedy under Section 18 of the RERA and secured a decree in their favour as passed by the UP RERA. The plan offered 50% better terms to creditors who had not approached RERA which was to the detriment of the appellants since they had already secured a decree from UP RERA. The plan was upheld by the Adjudicating Authority and subsequently by the National Company Law Appellate Tribunal (NCLAT) as well, thus paving way for the Supreme Court of India to decide the issue and eventually consider this ‘hyperclassification’ of homebuyers as ultra vires of Article 14 of the Constitution of India.
In its brief reasoning, the court relied on Natwar Agrawal (HUF) v. Ssakash Developers and Builders Private Limited and held that “to treat a particular segment of that class differently for the purposes of another enactment, on the ground that one or some of them had elected to take back the deposits together with such interest as ordered by the competent authority, would be highly inequitable.” The court also invoked the non-obstante clause vested in Section 238 of the IBC to hold that the IBC overrides RERA and that a decree obtained under the latter would not acquire primacy over the code.
Implications of Such ‘Hyperclassification’ and Aftermath of the Judgment
First and foremost, the Supreme Court of India, by deeming this ‘hyperclassification’ as invalid, managed to widen the amplitude of remedies available to homebuyers under the RERA as well as the IBC. Pursuant to this verdict, it is now open to the homebuyers to opt for more beneficial terms if offered by a resolution applicant despite having obtained a recovery certificate from the respective RERA authority for refund of their deposit amount. It should ideally bolster confidence in homebuyers who are largely interested in taking possession of their houses in the real estate project unlike financial creditors who look forward to nothing more than a return on their investment and long term financial stability, even if it means abandoning the project. Another reason why such classification would have proved to be detrimental to homebuyers is that financial creditors, unlike a class of creditors, possess vast financial resources which allows them to undertake riskier transactions. However, a class of creditors largely comprises individuals who do not possess like financial wherewithal and resources but merely based on the developer’s assertions and trust pour a large fraction of their savings into a real estate project.
Another implication of this judgement is its impact on the appellants’ right to participate in reverse CIRP. Reverse CIRP is a judicial construct which was first recognized and allowed by the NCLAT in Flat Buyers Association Winter Hills v. Umang Realtech. It is a process which is exclusive to real estate projects and allows the promoter of the project to act as an external lender and infuse cash for the completion of the proposed project within a specified time frame. This entire exercise is beneficial to all stakeholders as it prevents the CD from undergoing CIRP and offers the allottees to take possession of the project, if completed within the authorized timeline. However, as confirmed in a catena of cases, reverse CIRP can commence only after an agreement between the allottees and the promoter has been entered into.
An allottee has been defined in Section 2(d) of the RERA to inter alia include persons in favour of whom a plot or a building has been allotted. This definition was adopted by the legislature in the 2018 amendment as well without any modifications. To that effect, only homebuyers/real estate allottees (including deposit holders and debenture holders) as defined in Section 2(d) can form part of ‘creditors in a class’, which has been further defined in Regulation-2(1) (aa) of the IBBI (CIRP) Regulations 2016 to include a group of 10 or more financial creditors (other than banks and financial institutions). As a result, only real estate allottees forming part of a class of creditors can vote on a resolution seeking approval for the commencement of reverse CIRP. If the reverse CIRP is successful, the allottees can take possession of the project. However, in the instant case, the appellants, who were deemed to be financial creditors despite having a pending recovery certificate, would not have been eligible to vote on a resolution to initiate reverse CIRP. Not only would they be ineligible to take possession of the completed project, but they would also be forced to accept 50% worse terms than the ones being offered to the class of creditors.
Conclusion
By upholding the appellants’ status as forming part of a class of creditors, the Supreme Court of India has managed to preserve the sanctity of the 2018 amendment and reinforced homebuyers’ faith in the eventful insolvency of the developer. This verdict serves as an ideal example of the IBC’s commitment to striking a balance between resolution and collective welfare of the homebuyers.
Certainly, many elements of real estate insolvency are yet to be addressed by the legislature. For example, giving statutory recognition to reverse CIRP is much needed in real estate insolvency since the process, at present, continues to be governed by an agreement between the promoter and the allottees. Statutory recognition would entail setting out the criteria and pre-requisites for initiating reverse CIRP and also concluding the entire process within the timeline stipulated in the Code. Thus, the task has been cut-out for the legislature, and it remains to be seen how well the same is incorporated within the framework of the IBC.